A New Way to Invest in Commodities and Large Cap Momentum

A new family of ETNs called Elements Spectrum (www.elementsetn.com) launched by Nuveen Invesetments, Merrill Lynch, BNP Paribas, and Swedish Export Credit Corporation. Swedish Export Credit Corporation is the ETN issuer, and has a strong credit rating. Thus far, they have launched three products. Two ETNs track the metals (RJZ) and energy (RJN) subsegments of the Rogers International Commodities Index.

We have often made the point that from our perspective, the best commodities index product is one that equally weights exposure to three groups whose returns usually have low correlations with each other – energy, metals, and agricultural products. In terms of broad indexes, the DowJones AIG Commodities Index comes closes to this ideal. However, the introduction of subsegment commodity index products (e.g., by ETF Securities in the U.K. and Europe, or PowerShares in the United States) enables an investor to achieve an even better balance (though at the cost of more time spent rebalancing between them). In this regard, the new Elements ETNs are effectively more of the same.

More interesting, though perhaps not for the right reason, is the Elements Momentum Index ETN (EEH). Its goal is to generate superior risk adjusted returns by using technical trading rules to shift investments between large cap stocks (to keep down trading costs) in different market sectors – to put it differently, this is a sector market timing active management strategy nicely tarted up as an index fund. As noted above, the efficacy of technical trading rules is highly questionable. Moreover, if it turns out that this fund has one that works, what is to stop others from, at some point in the future, using a bit of regression to infer what the rule is (from changes in the ETN’s investment holdings) and then copying it?

Bottom line: Swedish Export Credit is an attractive ETN issuer; too bad about the product design.

Editor's note: see more on Commodities ETFs and ETNs.